• Jun
  • 15
  • 2006
  • 2:13 PM

Q&A about e-Quote and more

By: Ray Pellecchia
File Under: NYSE, NYSE

A reader e-mailed some questions about e-Quotes, quote display and CAP-DI orders. CAP-DI -- now we're really getting granular! Anyway, as usual, much of this goes way beyond my limited knowledge, so as usual I am highly indebted to a couple of HBCs for these answers.

Is a reserve e-Quote only at the BBO possible or also layered in the Book?

Reserves are only active at the BBO. Otherwise, they are simply e-Quotes away from the market.

An e-Quote generally is only seen in the Display Book?

Yes.

What are the difference (if exists) in showing the quotes at or outside the BBO?

SEC Rule 11Ac1-1 and Exchange Rule 60 require, among other things, that we publish the highest bid and lowest offer and the size associated with that bid and offer. This is what is quoted. An e-Quote that is at or establishes the BBO will be included in the quote. Interest away from the BBO is not considered "displayed." We publish limit orders entered via DOT on OpenBook. Individual e-Quotes are not visible in Display Book. What is visible is an aggregate amount of e-Quoted interest at a price, except that a floor broker has the option of excluding his or her interest from this aggregate. This information is necessary for manual trading purposes.

What is a CAP-DI Order?

A CAP (convert and parity) order is a percentage order that "goes along" with the market; DI stands for destabilize and immediate. A CAP-DI is the most versatile of percentage orders. As with any percentage order, it is elected when an execution occurs at the order's electing price. The amount elected is the amount of the trade, i.e., the electing sale is for 1,000 shares, this elects 1,000 shares of each CAP-DI order electable at that price. All elected CAP-DI's trade in parity with each other.

It also has some other features -- broadly speaking, the "convert" feature allows the specialist in certain situations to convert all or part of the order to a limit order without the need for an electing sale, to trade with the BBO or to establish a new BBO (again, this is a broad description; these features are subject to a number of requirements). The specialist can do this on a stabilizing tick (i.e. buy on a minus tick, sell on a plus) or destabilizing (buy on a plus, sell on a minus) -- that is the "D". If the elected or converted portion of the CAP order isn't executed, it reverts to CAP-DI status; that's the "I". The "P" can stand for two things -- the parity with other CAP-DIs, as noted above; and the fact that by entering this order, the broker has given the specialist permission to trade on parity with the CAP-DI order.

Hope that answers your questions.

Comments

First, thanks for your answers. But what happened with the reserve portion of a reserve e-Quote when the BBO is changed? I suppose it’s channelled?

Another question is keeping in my mind: If I quote outside the BBO, I would have the opportunity of price improvement during a sweep. This opportunity isn't there when I’m quoting at the BBO. Why are customers who quoted at the BBO penalised? I suppose I forget something here.

Thanks a lot!

by Jan Steenbergen on June 16, 2006 8:08 AM

Jan -- Your additional questions are annotated below with answers.

But what happened with the reserve portion of a reserve e-Quote when the BBO is changed? I suppose it’s channelled?

-- The reserve is treated simply as an equote away from the quote. e-Quotes away from the quote are not published so there is no need to differentiate between published and reserve.

Another question is keeping in my mind: If I quote outside the BBO,

-- There is no such concept as quoting within the same market center outside the quote; we have a limit-order book that is published called OpenBook, but that is not really quoting.

I would have the opportunity of price improvement during a sweep.

-- Not any more; electronic sweeps have been changed to execute at each price point. If there is a manual sweep on the floor as a result of a negotiated trade, then you may be price improved.

This opportunity isn't there when I’m quoting at the BBO. Why are customers who quoted at the BBO penalised?

--Federal security laws regard the inside quote as a firm bid or offer to buy or sell stock, and those prices must be honored by law.

Thanks again for your questions.

by Ray Pellecchia on June 16, 2006 3:55 PM

“Not any more; electronic sweeps have been changed to execute at each price point.”

In Hybrid Training Program Vol. 6 the concept of residual sweep is explained. The first execution occurs against the Price at the BBO and the residual portion executes to the clean up price. Is the sweep concept that’s there described changed or there are misunderstandings on my side?

Many thanks!

by Jan Steenbergen on June 19, 2006 5:33 AM

Ok, now I'reading Hybrid Training Program Vol. 26. Sorry, that's my fault.

When are the update versions expected?

by Jan Steenbergen on June 19, 2006 6:12 AM

Jan -- Weeks 6 and 7, concerning sweeps, have been updated in this pdf. We'll have additional updates on a periodic basis throughout the rest of the year.

Thanks very much for sharing your background. Congratulations on getting your trading license, and I wish you great success with your dissertation. I'm amazed and delighted that someone at a university in Frankfurt has chosen the Hybrid Market for a dissertation; how did you come to hear of the Hybrid and make that choice?

And please, no apologies necessary for your English. It's very clear, and much better than my German!

by Ray Pellecchia on June 19, 2006 9:41 AM

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